Regulator publishes new DC Code of Practice

The Pensions Regulator's new Code of Practice on the "Governance and administration of occupational trust-based schemes providing money purchase benefits" came into force on 28 July 2016. The Code and guidance were subject to consultation prior to coming into force.

The Regulator has revised the Code to support implementation of the recently introduced governance legislation and to raise the overall standard of DC scheme governance and administration. The Code lays out the standards that the Regulator expects of trustees of schemes with money purchase benefits.

The Code and guidance apply to all schemes which hold money purchase benefits, including hybrid schemes and schemes where the only money purchase benefits are derived from AVCs. The extent to which the Code and guidance will actually apply will depend on the exact legal requirements and the nature of the money purchase benefits. For example, some of the legal requirements do not apply to schemes where the only money purchase benefits are AVCs and so those parts of the Code and guidance dealing specifically with that will not be relevant. Trustees should apply a proportionate approach where not all benefits under the scheme are money purchase.

The Code is accompanied by six separate ‘how to’ guides which provide recommended best practice and suggested approaches for trustees. Areas covered include:

  • The trustee board – including assessing fitness and propriety, the role of the chair of trustees, sub-committees and board meetings;
  • Scheme management skills – including trustee knowledge and skills, working with advisers, providers and employers, conflicts of interest and risk management;
  • Administration – including core financial transactions, administration reporting, quality assurance, disaster recovery and data quality;
  • Investment governance – including designing arrangements (including default arrangements), financial and non-financial factors, strategy and performance monitoring and the security of assets;
  • Value for members – recognising that there is no single approach to the assessment of value and that assessments should consider quality and the scope of the scheme provision and including illustration on how value should be assessed; and
  • Communicating and reporting – including using existing knowledge and data to know the membership, the importance of communications particularly as part of the retirement process and covering reporting in the annual chair’s statement. 

In addition, the Regulator has produced a template to help trustees assess their compliance and to assist in the preparation of the annual Chair's statement.

The Regulator has also published its research into the type and prevalence of challenges which money purchase and hybrid schemes faced in relation to the legislative governance standards and the standards of conduct and practice in the new Code.

Unsurprisingly, the survey findings consistently show that larger schemes outperform small schemes on all aspects of governance and administration.

The key findings include:

  • A significant proportion of trustee boards of micro and small schemes reported that their scheme is used or will be used for automatic enrolment.
  • Awareness of the legislative governance standards were near universal, but knowledge of the requirements was poorest in smaller schemes.
  • Awareness and knowledge of the new DC code increased with scheme size and reported compliance with the governance standards generally increased as scheme size increased.
  • Large schemes and master trusts generally met the requirements of the following standards - knowledge and understanding and investment obligations in default strategies. However, standards on value for members and core scheme financial transactions were more challenging for all types and sizes of scheme.
  • Although use of external service providers/advisers was widespread, most smaller schemes did not assess their performance.
  • There was some disparity between reviewing investment performance and having investment objectives among smaller schemes.
  • Larger schemes were most likely to take account of members’ preferred retirement dates when developing investment strategies.
  • There was significant variation by scheme size in the frequency with which different information was communicated to members.
  • The majority of schemes were confident that the trustee board understood the requirements of the annual chair’s statement, but confidence was lower among smaller schemes.
  • Scheme returns were typically reviewed by trustee boards prior to submission.
  • Most schemes administered in-house did not have a documented business continuity plan.
  • Schemes were more likely to run periodic checks that member contributions reconcile than to conduct a full audit of all contributions.

It is therefore expected that the Regulator will continue to push smaller schemes to drive improvements in governance. 

It is important for trustees of all scheme sizes to familiarise themselves with the latest Code and the Regulator’s expectations.